The recurring problem of recurring payments in India
The result of all this is that founders of SaaS companies are, and will continue to be, reluctant to set up operations in India.
Enabling seamless recurring online payments remains a recurring problem in India. Over the last few years, it’s been a case of one step forward, two steps back.
Let’s take the latest Reserve Bank of India (RBI) rules for recurring payments, which came into effect on October 1, 2021. Under the new norms, customers have to re-authenticate recurring transactions of up to Rs 5,000. After a two-factor authentication, customers would be charged and an e-mandate would be set up for subsequent payments.
For recurring payments above Rs 5,000, the customers now have to give their consent and go through a two-factor authentication process for every payment. Banks also have to send consumers a notification about a transaction before and after it has occurred, via SMS or email.
In theory, the system is meant to give the customer control and choice over which transactions they want to continue with.
However, in practice, the system hands control of recurring payments to the middleman: the banks. It is the banks that now decide which services are enabled for recurring payments (up to a limit of Rs 5,000) and which are not.
As The Ken makes clear, the companies that can comply with the rules are generally those that are “well connected.” The banks had also not created the infrastructure to implement the new rules by October 1, 2021, despite being given two years to do so, plus an additional six months. All of which has created chaos for both customers and companies.
Twitter was awash with tweets from customers whose subscriptions had failed. If a company was not on a bank’s list, or the bank had not even set up their list yet, well, the customer was out of luck. The rules have also made it all but impossible to subscribe to a service from a company outside India.
For example, if you subscribe to The Wall Street Journal, chances are you have lost your subscription because your payment can no longer be processed under the existing rules.
The problems this creates on the supply side were also illustrated by The Ken, which spoke to the CEO of a SaaS company called Codedamn, which teaches coding. Its customers come from all over the world and pay a monthly subscription to access their lessons. When the CEO, Mehul, was asked how his business had been affected by the RBI regulation, he said, “We’ve lost about 60% active Indian subscriptions on Codedamn. Cards just stopped working”.
Impact on startups
Think about the effect all these failed transactions have on the projected cash flow of a company. It creates a much riskier environment, and a more uncertain one. In addition, the rules might also impact a firm’s ability to pay monthly subscriptions for cloud hosting.
They also put Indian companies at a competitive disadvantage by preventing them from offering the same seamless payment experience that companies outside India do.
The result of all this is that founders of SaaS companies are, and will continue to be, reluctant to set up operations in India. It makes more sense for them to establish their operations and chase customers in other geographies. This, in turn, holds back the growth of the SaaS sector in India.
Ideally, policy should be formulated to encourage the sector to grow given its potential to contribute to the Indian economy.
In 2021, investment in Indian SaaS companies grew 170% over 2020 to $4.5 billion and the sector is expected to reach $30 billion in revenue by 2025, according to a report by consulting firm Bain & Company. By 2030, the sector could be worth as much as $1 trillion dollars and could create half a million jobs.
Not a new problem
Facilitating recurring payments has not been an easy ride in India, even before the RBI’s latest set of rules were announced. Earlier protocols such as NACH and ECS could take up to a month to create a payment mandate. Even when eNACH was introduced in 2016, the e-mandate still took a day or two. Therefore, a customer could not set up a subscription, say for Netflix or HotStar, and start using the service immediately.
Allowing cardholders to create standing instructions did address that issue, but was limited to credit card holders, which are only a small fraction of users compared to debit cardholders. (As of April 2020, there were 57 million credit cardholders in India compared to 829 million debit cardholders.)
To be sure, customers can make recurring payments up to the limit of Rs 5,000 by using UPI’s Autopay, which is not affected by the new regulation. UPI is the most preferred system of payment in India today and the AutoPay feature allows for the instant one-time creation of mandates through a UPI PIN.
However, as Deepti Rajeev points out in The Times of India, not all UPI applications support Autopay.
In addition, the focus on UPI also obscures other issues that start-up founders face. For example, cross-border payments remain a challenge, especially during exits. Companies can also face problems getting access to their money that comes from foreign sources because banks are either unsure of the correct procedure or the procedures just take a long time.
Recurring transactions are a small percentage
There is also an argument that recurring transactions represent only a very small volume (2.5%) of all transactions and an even smaller percentage in terms of value. Therefore, few people and organisations across the country are affected by these rules. But that argument misses the point.
Recurring transactions are good business for SaaS companies. Therefore, if the SaaS sector is to grow and create value, the percentage of recurring transactions has to grow, too.
As an article in The Print points out, both the 2016 Watal Committee and the 2019 Nandan Nilekani Committee stressed the importance of recurring transactions in their reports.
“If merchants are unable to provide top-notch and seamless quality of services to consumers, there will be tangible repercussions on value creation in digital markets and consumer welfare will be dented,” the authors write.
That’s an outcome no one wants.
ADIF’s work in the digital payments space
If the Indus Valley ecosystem has to grow, our companies should be able to compete with their global counterparts in terms of providing a seamless digital payment experience.
In the same vein, following RBI’s norms on card data storage and tokenization, ADIF partnered with the Merchant Payments Alliance of India to voice concerns over industry readiness and request an extension of the December 31 deadline for implementation of norms.
Following this intervention, the Reserve Bank of India extended the deadline for the same by six months.